The government’s stance of prioritizing domestic demand over exports and abandoning export-orientation is detrimental for the country’s economy and "akin to killing the goose that lays the golden egg", former Chief Economic Advisor Arvind Subramanian has written in a research paper.
Subramanian, who is currently the director of the Ashoka Centre for Economic Policy, has co-authored the paper titled 'India’s Inward (Re)Turn: Is it Warranted? Will it Work?' with Shoumitro Chatterjee of Pennsylvania State University in the United States.
"India is turning inward. Domestic demand is assuming primacy over export-orientation and trade restrictions are increasing, reversing a three-decade trend," the paper said.
The paper said that this shift was based on three misconceptions: that India’s domestic market size is big, India’s growth has been based on domestic not export markets, and export prospects are dim because the world is de-globalizing.
"In fact, India still enjoys large export opportunities, especially in labour-intensive sectors such as clothing and footwear. But exploiting these opportunities requires more openness and more global integration," the note said.
"Indeed, given (the) constraints on public, corporate and household balance sheets, abandoning export orientation is akin to killing the only goose that can lay eggs," it said.
The paper said that even as the COVID-19 pandemic has ravaged the Indian economy, the discussion is turning to the medium-term and in particular to India’s post-pandemic development model.
"So far, the intellectual and policy consensus seems to favor an inward orientation. This consensus was emerging even before Covid had struck, reflected in increasing calls to Aatmanirbharta," it said.
The paper argues that the Indian domestic market is still quite small, and is likely to remain so over the medium-term, since domestic demand will be weighed down by heavy debt across the economic horizon -- in firms, households, and the government.
"The second myth is that India’s growth has been driven by domestic demand, not by exports, and definitely not manufacturing exports. Our evidence illustrates the opposite, namely that for three decades a stellar export performance has played a critical role in India’s overall growth."
"We show that India has considerable room to increase exports by increasing its market share. India has been gaining market share for several decades now, even during the difficult global conditions of the past decade," it said.
The paper said that a strategy of abandoning exports to focus on the domestic market will give up perhaps the most valuable opportunity for growth and that a strategy of offering protected access to India’s market as a way of convincing firms to relocate their global production to India will not work.
"To the contrary, the big export opportunity for India -- low-skill manufacturing -- can only be exploited through less protection and more outward orientation because this industry is import-intensive, as China and the other successful low-skill exporters have shown."
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